Philippine Economy Can Weather the Storm; Inflation Likely to Rise

The devastation wrought by Typhoon Haiyan could shave as much as 1.4% off Philippine economic output this year and drive up inflation, but won’t significantly slow the country’s economic momentum, HSBC wrote in a report Tuesday.

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Thousands were feared dead in the super-typhoon that hit the Philippines over the weekend.

It also said the disaster highlighted the country’s infrastructure shortcomings and exposed the urgent need for the government to boost public-works investment.

The Philippines has been one of the fastest-growing economies in Asia this year — gross domestic product grew 7.6% in the first half of the year — and that strength is likely to continue, Ms. Nguyen said. Data out Tuesday showed exports rose strongly in September, up 4.9% on-year and 10.1% from the previous month, driven by electronics.

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Typhoon Haiyan slammed into the eastern Visayas region last Friday and cut a swathe of devastation through the center of the archipelago, leaving thousands of people dead and as many as 20,000 homes destroyed – destruction remarkable even for a country beset by frequent natural disasters.

The damage was most severe in the provinces of Leyte and Samar, agricultural areas that aren’t major contributors to the Philippine economy.

About 6,000 hectares of sugarcane were destroyed, along with corn and rice. Losses in those crops, plus the region’s fishing industry, will likely total around US$324 million, or about 0.2% of gross domestic product, HSBC economist Trinh Nguyen estimated.

The government expects total output from the worst-hit areas to fall around 8%. If the entire central region affected by the typhoon were to lose 8% of output, GDP could fall by some 1.4%, HSBC estimated.

While that’s not a severe blow to the economy, “the impact on inflation is likely to be more dramatic, with supply shocks pushing up headline inflation in the coming months,” Ms. Nguyen wrote.

But inflation has been restrained lately — the consumer price index rose 2.9% on-year in October – and should remain within the central bank’s target of 3%-5% next year despite the storm impact. That means that “even with an adverse supply shock, the central bank has room to keep policy rates accommodative to support growth,” Ms. Nguyen wrote.

But it does make a rate increase more likely next year, she wrote.

“We think a hike looks imminent in 2014 in order to temper inflationary pressure” and deal with the U.S. Federal Reserve Board’s expected end to its economic stimulus, Ms. Nguyen wrote.

The country’s population has grown by nearly one-third in the past 15 years, from about 74 million to 98 million, but infrastructure spending has fallen from about 5.6% of GDP to just 3% — low by regional standards and far below what’s necessary in a country with shoddy transportation links among its far-flung islands.

“With strong population growth rates and frequent natural disasters, the Philippines must step up its infrastructure spending,” Ms. Nguyen wrote. “The administration aims to raise spending on public works to 5% by 2016. If it succeeds, the future will look brighter.”

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